Rentokil loses 1% after sudden departure of City Link boss

Rentokil Initial has replaced the boss of its struggling City Link parcel delivery business for the second time in less than 18 months.

The support services group said Stuart Godman had resigned "by mutual consent", to be replaced by the company's chief executive Alan Brown until a replacement is found. The company said the difficult trading conditions seen in the third quarter had continued in the run up to Christmas, so City Link's full year performance would be no better than last year's outcome, when it made a £9m loss. It blamed the recent severe weather, almost inevitably.

But it did say that City Link's shortfall would be largely made up by the other businesses, so Rentokil's full year profit expectations remained unchanged.

Godman took over City Link in July 2009 following the surprise departure of Petar Cvetkovic, half way through a programme designed to revive the fortunes of the business. Both Godman and Cvetkovic joined Rentokil from Target Express in November 2006 after Rentokil bought the group.

As we suspected, trading at City Link has failed to improve. We had penciled a return to a breakeven position in the fourth quarter of 2010. This is now unlikely to be achieved. Although management expect City Link's shortfall to be compensated by performance elsewhere in the group, we remain comfortable with our bottom of the range forecasts for 2010 of £192.8m compared with consensus of £198m. Rentokil is trading on a prospective PE of 12 times 2010 which is expensive compared to peers Davis Service Group Mitie. We reiterate our hold recommendation and move our target price to 95p.

Panmure Gordon had similar views, with analyst Mike Allen saying:

While we continue to believe that the long term attractions of investing in Rentokil remain clear, we do not think it will be re-rated from here until earnings momentum turns positive again, with City Link clearly hindering this at present. We maintain our target price of 96p based on 11 times 2011 estimate earnings per share, and anticipate some share price weakness on the back of this latest setback and therefore maintain a hold recommendation.